Christopher Walker and Mark Way outline the steps Swiss Re is taking to tackle climate change

Last year, climate change took centre stage as countries across Europe experienced their hottest summer on record, resulting in economic losses from crop failure and forest fires alone totalling $14bn. And yet during 2002 major floods across Europe caused total damage of almost $16bn and insured losses of just over $3bn.

Extreme events such as these mean that the issue of climate change has been fast moving up the political and business agenda of late. Climate change is no longer regarded as just a theory, it is a fact and it is already having an effect on insurance business. One study by the United Nations Environmental Programme Finance Initiative (UNEP FI) puts the cost to the global economy of climate change-driven natural disasters at $150bn per year within the next decade, based on current trends.

While extreme events cannot be used to furnish proof or counterproof of climate change, a trend towards more extreme and intense weather events is consistent with the developments that climatologists expect in a warmer climate. Research by the International Panel on Climate Change (IPCC) suggests that the increase in the surface temperature for the northern hemisphere during the 20th century was probably greater than that of any other century in the last thousand years. IPCC projections put the increase in average global surface temperature in the range of 1.4 deg C to 5.8 deg C over the period 1990 to 2100. This is likely to be without precedent during the last 10,000 years and is equivalent to about two to ten times the observed warming over the 20th century.

The IPCC has also produced strong evidence that most of the warming observed over the last 50 years is attributable to human activities. According to the IPCC, atmospheric concentrations of greenhouse gases reached record levels in the 1990s due to the combustion of fossil fuels, agriculture and land use changes. The projected concentration of CO2 in the year 2100 ranges from 540 to 970ppm compared with 368ppm in the year 2000. Concentrations also without precedent in human history.

Broad academic consensus

Scientists generally agree that as the average global temperature rises, the probability and distribution of extreme climatic events, such as those seen in Europe during 2002 and 2003, will gradually alter. And it is not only extreme events that are affecting the insurance industry. According to research by Jean Palutikof 1, between November 1994 and October 1995 England and Wales experienced an unusually warm period where the average temperature was 1.5 deg C - 3 deg C higher than the mean figure for the years 1961 to 1990. British farmers sustained losses of £180m while the warm weather resulted in a net loss of £355m to the power industry. Insurers paid out £380m as a result of damage to buildings due to drought-induced subsidence.

The lesson we learn here is that climate change has the potential to cause the re/insurance industry losses from gradual changes as well as from major extreme weather events.

Real relevance

Climate change is probably one of the most important issues facing the insurance industry today. Swiss Re has identified climate change as an important element of our long-term risk management strategy. It has implications across all of our business groups as a risk and an opportunity. Few other factors affect more the bottom line of our clients, insurance companies, than natural catastrophes. We believe that climate change has the potential to affect the number and severity of these natural catastrophes and result in a very significant impact on insurance business. While it is difficult to quantify the actual and future impacts of climate change on catastrophe losses, the overall trend towards more extreme events could lead to larger losses in some areas - even a small change in event severity can lead to multiple increases in damage.

Climate change also affects our business in other ways. There is the potential for it to create uncertainty for mortality rates effecting life and health reinsurance business. On the investment side it can create uncertainty with regards, to the future performance of investments while it can create new liabilities for our corporate insurance clients.

Facing the challenge

As a leading reinsurer of natural perils, Swiss Re recognises that climate change presents an important risk for the insurance industry. As such we continue to build on our expertise and knowledge in the field of natural catastrophes and the potential affects of climate change. By working with academic institutions and supporting specialised research we can help our clients better prepare for extraordinary weather events, such as droughts or heat waves, and to mitigate their economic impact. We are currently participating in a research project to access the accuracy of medium- to long-term statistical weather forecasts with the Swiss National Competence Center in Research on Climate (NCCR Climate). These activities allow Swiss Re to adapt our business to climate change and ensure that we are in a position to continue offering reinsurance for natural catastrophes in the future.

Swiss Re has already identified potential climate change risks to various areas of our business. Last year, we were the first in the industry to identify and act upon the potential climate change related risks in directors' and officers' (D&O) insurance. In accordance with Swiss Re's best underwriting practice, we actively watch out for potential future exposures that may have an adverse effect on the risk profile of our company and clients.

While the company does not presently plan any restrictions we are making clients aware that directors and senior managers may in the future be held responsible if their companies fail to manage their carbon liabilities effectively or to comply with emissions regulations.

In the short-term, the effects of climate change can be lessened by influencing human settlement patterns and implementing effective risk and catastrophe management. Risk-adequate insurance rates and conditions may serve as an incentive to encourage loss prevention and guarantees the financial compensation for catastrophe losses. But measures must also be taken now to protect our climate in the long term.

The financial services industry has a real opportunity and an obligation to contribute to the climate change debate and provide solutions to these problems through its own investments and business expertise. After all, climate change and substantial emissions reductions ultimately turn into a financial issue. Our industry needs to lead by developing financial solutions and risk mitigation techniques to assist our clients in adapting sustainable and sound business practices. To do its part the financial services industry must also transform corporate responsibility statements and commitments into concrete business activity and opportunity.

Swiss Re is developing solutions to assist in the facilitation of developing market mechanisms to reduce emissions. Market-based emissions reduction programmes, such as the proposed Kyoto Protocol, use market pricing and economic incentives to seek the most efficient and effective means to achieve reductions in carbon emissions. Although the ratification of Kyoto is still pending Russian ratification, in 2003 the European Union approved the regulatory framework for its own emissions trading system which comes into force in 2005. This market will cover 40% of European point sources of CO2 emissions and create approximately EUR15bn worth of carbon assets and liabilities per year. Emissions reduction programmes are also planned in Canada, Japan and at least ten states in the US.

In 2001, Swiss Re followed up its long involvement in climate change research by creating a business unit called Greenhouse Gas Risk Solutions (GHGRS). This unit is the result of an holistic feasibility study that assessed where, when and how Swiss Re could and should play a role in facilitating emissions reductions. This unit's purpose is to develop business opportunities in line with Swiss Re's sustainable commitment. Its main job is not only to develop new products but to get Swiss Re's insurance, finance and investment professionals to think differently and apply their expertise in environmental finance.

In 2003, GHGRS designated renewable energy and in particular wind power as a strategic sector for new risk solutions. As average installation and turbine size increase, capital requirements have risen correspondingly, creating demand for insurance capacity and structured finance.

Voluntary measures

Swiss Re also believes that the insurance industry should not simply be observers of this changing pattern of risk brought about by climate change. Swiss Re has undertaken a number of voluntary measures to mitigate its effect on the environment and promote activities with stakeholders on sustainability issues such as climate.

Every year, Swiss Re emits the equivalent of five to six metric tonnes per employee of CO2 amounting to a total of about 46,000 tonnes for the whole group. To reduce Swiss Re's emissions footprint to zero, the company announced in October 2003 a ten-year programme to become greenhouse neutral.

So far we are the largest financial institution to adopt such an initiative.

Where possible, Swiss Re has invested in energy efficient buildings for its business use. In December 2003, our staff in the UK began moving into Swiss Re's new office building at 30 St Mary Axe, London. The building is expected to use 50% less energy than a traditional office building of this nature.

Swiss Re also believes in building awareness of the need to switch to renewable energy sources and to reduce carbon emissions. We are promoting activities amongst investors, clients, governments, the scientific community and business to establish a clear understanding of the risks and opportunities associated with climate change.

Swiss Re recently participated in the launch of the Climate Group, a not-for-profit organisation that brings together some of the world's leading reducers of greenhouse gas emissions. The Climate Group is a charity founded by the Rockefeller Brothers Fund (RBF) to build a coalition of governments, non-government organisations and industries to share and exchange knowledge in reducing greenhouse gas emissions.

We are also a member of the Climate Change Working Group of the UNEP FI, a global partnership between the UN and 236 financial institutions including insurance and reinsurance companies and fund managers, which was set up to establish industry best practice. In January, the UNEP FI working group published a CEO briefing on emissions trading, outlining the principle challenges that emissions trading markets must address if they are to be economically viable.

Conclusion

Swiss Re is addressing the issue of climate change in order to help our clients adapt to its affects but also to attempt to mitigate the long term effects of climate change. How corporations deal with climate change will be among the keys to determining long term successful business practice for both our clients and ourselves.

Reference

1. JP Palutikof, S Subak and MD Agnew: Impacts of the exceptionally hot weather of 1995 in the UK, Climate Monitor Vol 25 Number 3.

- Christopher Walker is managing director, greenhouse gas and environmental solutions, Swiss Re, and Mark Way is a member of Group Sustainability Management, Swiss Re.